Industries have characteristics that oftentimes dictate what is “non-recurring or recurring because they are unique to that industry.” For example:
- Pharmaceutical firms typically incur substantial recurring R&D expenses. Those type of expenditures would be recurring, rather than one time. In fact, deferral of such recurring costs might warrant a normalizing, pro forma adjustment to include those costs, thereby lowering EBITDA and the related valuation.
- Some technology firms are oftentimes subject to recurring inventory obsolescence write-downs. Our firm has seen instances in which a company has understate those costs. Adjusting for those type of recurring expenses to increase EBITDA has inappropriately increased the related valuation. Understanding the industry and the specific business is key to distinguishing legitimate adjustments from aggressive ones.
